Facilitating stakeholder-interest maximization: accommodating beneficial corporations in the Model Business Corporation Act.

• Author: Patel, Rakhi I.

1. Introduction II. Beneficial Corporations A. General Structure B. Why Current Corporate Law Is Insufficient to Guarantee Stakeholder-Interest Maximization 1. Articles of Incorporation a. Takeovers As a Threat to the Corporation's Original Purpose b. Corporate Adherence to Social Missions 2. Corporate Bylaws 3. Constituency Statutes C. Examples of Socially Responsible Corporate Forms 1. United Kingdom: Community Interest Companies 2. Vermont: Low-profit Limited Liability Company ("L3C") 3. Minnesota: Socially Responsible Corporation III. Potential Conflicts A. Shareholders B. Stakeholders C. Takeover Threats by Other B Corporations D. Standards of Liabilities for Directors IV. Recommended Provisions for a B Corporation Amendment to the Model Business Corporation Act V. Conclusion I. INTRODUCTION

   Milton Friedman noted in 1970, that "the social responsibility of business is to increase its profits." (1) This notion has continued to permeate the U.S. corporate system for nearly four decades, (2) and until recently it was primarily social investors who examined a corporation's social and environmental agenda when making investment decisions. (3) Now, however, more traditional investors, including those on Wall Street, are evaluating companies on a range of corporate social responsibility issues in addition to conventional financial analysis. (4)

   The basic idea is that a "good record on corporate social responsibility and governance is good for business," which is in the long-term best interests of shareholders. (5) Thus, there is a growing acceptance among investors that a for-profit corporation can both generate a financial return for shareholders, while also pursuing social, environmental, or community agendas. (6)

   One notable problem is that there does not currently exist in U.S. corporate law a widely accepted corporate form to accommodate those social businesses that seek to adhere to a social, environmental, or community agenda while also providing a return to investors. However, one proposed model to embody this idea is the beneficial corporation (also known as a B Corporation), (7) which is a new corporate form that straddles the for-profit and nonprofit sectors. (8) A B Corporation, also known as a socially responsible corporation ("SRC") or a "for-benefit organization," (9) uses the power of business to solve social and environmental problems. (10)

   The basic idea behind the beneficial corporation is to formalize what social investors have been doing for a number of years by embedding social, environmental, or community goals into the corporation's governing documents, such that the board of directors and officers are charged with creating economic value for shareholders while also adhering to its stakeholder based agenda. (11)

   Despite the lack of a widely accepted B Corporation form in the fifty states' corporate laws, over 160 corporations in thirty industries have already attempted to configure their articles of incorporation to become a B Corporation. (12) Collectively, B Corporations are responsible for generating significant amounts of revenue. (13) Thus, there is a strong need for a new corporate form because for-profit corporate directors have a fiduciary responsibility to maximize shareholder wealth, which can be incompatible at times with the corporation's social agenda. This is especially true in situations where the board must make zero-sum decisions in which some stakeholders inevitably gain while others lose. (14)

   It remains unclear at this time if simply having the articles of incorporation reflect the corporation's primary commitment to stakeholder based goals will suffice to withstand the judicial system's scrutiny of whether directors are complying with their fiduciary duties to shareholders. Other problems include how to prevent takeovers of B Corporations by investors who seek to do away with the corporation's original stakeholder-based agenda, how to discourage management from "play[ing] one stakeholder group against another [to] escape accountability," (15) and what the standards of liability should be for directors of B Corporations given that they must focus primarily on stakeholder benefit maximization rather than shareholder wealth.

   Previous scholars have already analyzed whether a new corporate form is necessary to support a stakeholder interest maximization model, and scholars have come down on both sides of the debate. (16) This Article seeks to add to the literature by examining scenarios in which a separate B Corporation corporate form would provide a solution to the problems detailed above, and by proposing that the ABA enact a Beneficial Corporation provision in its Model Business Corporation Act to specifically address this issue. (17) The MBCA has been adopted either in whole, or in substantial part, by over thirty states. (18)

   As such, amending the MBCA to reflect a new B Corporation form would promote wide acceptance in many states' corporate laws. States, such as Vermont, Minnesota, and California, have already passed or are working on drafting amendments to their corporate laws that would provide for this type of new corporate form to straddle the for-profit and nonprofit sectors. (19) The Article proceeds as follows:

   Part II provides a background on how beneficial corporations are being structured currently, including different forms proposed by national and state governments to allow for-profit companies to pursue public, social, or environmental agendas. (20) Part III details scenarios in which beneficial corporation directors are likely to run into conflict between the corporate charter mandates, fiduciary duties to shareholders, and their own self-interest. (21) Part IV provides recommendations for provisions the ABA should enact in the Model Business Corporation Act ("MBCA") and discusses how these proposals potentially resolve the conflicts detailed in Part III. (22)

2. BENEFICIAL CORPORATIONS

   The idea of using corporations for the public good is certainly not novel to the twenty-first century. (23) The first corporations in the United States were established specifically for the good of society as these entities helped to build infrastructure such as bridges and roads. (24) In 1932, E. Merrick Dodd, Jr. argued that the corporate person should be held to the same concept of citizenship as an individual, so that it is acceptable for corporate managers and directors to consider social obligations over economic self-interest. (25) The modern pursuit of corporate wealth and profit maximization has eclipsed this public role espoused by Dodd, however, and there currently exists no universally accepted corporate form that is a hybrid form of modern for-profit and nonprofit entities. (26) This Part describes the general structure a B Corporation would embody if created, explains why current state corporate law is not sufficient to provide a sound legal structure to protect stakeholder interests, and provides examples of recent efforts to implement the B Corporation form into modern corporate law. (27)

   1. GENERAL STRUCTURE

      The typical for-profit public corporation--C or S Corporation--in the United States utilizes the following structure: shareholders meet annually to hear management's performance report, to elect a board of directors, and to vote on any other issues that require shareholder approval. (28) The board of directors serves as the intermediary between management and shareholders, acts in the best interests of the shareholders, elects officers to run the corporation on a day-to-day basis, and meets with management to oversee activities in order to protect shareholder interests. (29)

      Whether classified as a C Corporation, S Corporation, or LLC, these entities are all governed by the same pressure to maximize profits, often to the exclusion of or despite employee, environmental, and social concerns. Directors and officers pursue short-term profit maximization because companies, and, as a result, board and management performance, are valued on the basis of quarterly earnings reports. (30)

      In contrast, a B Corporation would ideally be structured as a C Corporation from an ownership and tax perspective, but its charter and bylaws would explicitly command its directors and officers to consider specified outside stakeholders in addition to maximizing shareholder wealth. (31) Often described as a double (32) or triple bottom line, a B Corporation takes into account financial, social, and environmental factors. (33) By codifying these social or environmental goals into the corporate charter, the general idea is for the founders' original ideals to be maintained even if new management comes in or there is a takeover. (34) The hope is that this structure will attract shareholders who want to invest in a company that is "well-managed, [and] effectively advance[s] their social mission...." (35)

   2. WHY CURRENT CORPORATE LAW IS INSUFFICIENT TO GUARANTEE STAKEHOLDER-INTEREST MAXIMIZATION

      Some may argue that current default corporate form rules allow for parties to guarantee stakeholder-interest maximization simply by drafting the articles of incorporation. (36) Others may argue that the business judgment rule protects a board's decision to pursue social goals. (37) Einer Elhauge contends that stakeholders might simply "legally protect themselves by contract with the corporation." (38) However, this proposed solution is inadequate because modern corporate law presents certain ambiguities with the B Corporation structure.

      For example, what duties do B Corporation directors have to stakeholders versus shareholders? Is the former a contractual duty, while the latter remains a fiduciary duty? (39) If the B Corporation's shareholders change their minds about the entity's social or environmental goals and vote to amend the articles of incorporation, should the board be able to prevent it? Does the business judgment rule protect B Corporation director decisions only...